Market regulator Securities and Exchange Board of India (SEBI) is looking at reviewing regulations on the illegal trade practice of front-running in the capital market to plug legal loopholes in the existing regulation and safeguard investor interest.

Front-running refers to the practice of using confidential information for buying or selling securities, owned by a broker or trader, ahead of future trades to take advantage of the price movement.

The need for a review of the regulations has risen in the wake of a recent Securities Appellate Tribunal (SAT) ruling setting aside a SEBI order on grounds that current regulations on Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets Regulations, 2003, (FUTP Regulations) do not clearly define the term “front-running,” and even if a particular fraudulent transaction can be construed as front-running, it applies only to market intermediaries and not individuals.

According to the November 9 order, Dipak Patel, an investment advisor with an FII had allegedly indulged in front-running by passing on information about future trades to his cousins. The trades occurred between 2007 and 2009. According to SEBI’s probe, Patel and his cousins made profits of Rs 1.56 crore through these trades. While the regulator barred Patel from the securities market, his cousins were directed to deposit the profits to the tune of R1.03 crore.

However, SAT overruled the order citing reasons that SEBI regulations pertained to offences committed by intermediaries and not individuals.

“Front running as an offence is definitely pursued to be for intermediaries. So (does) somebody who is an indirect beneficiary come under the purview or not. Of course common sense and justice demands that it should be there,” said SEBI chairman U.K. Sinha on Friday.

“On this particular aspect of front-running, we will have to look at our regulations to see if it needs more improvement and strengthening,” he further added.

Elaborating on the issue’s relevance in the context of the recent amendment in insider trading regulations, Mr Sinha said: “In insider trading, the regulations were different earlier. But now the regulations are that even if you are in the know of that information, whether we are able to establish whether you have used that information or not is immaterial; the very fact that you are possessing that information is enough for us. Given this particular example we will need to have a serious look at our regulation.”

Market experts are divided over the definition of the word “intermediaries” and argue that individuals should also be included to avoid fraud and protect investors.

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